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A Couple Stored IRA Gold at Home. They Owe the IRS More Than $300,000.

cagcrispcagcrisp Posts: 1,057 ✭✭✭✭✭

From WSJ…

“It’s official: Owners of individual retirement accounts with assets invested in gold and silver coins can’t store them in a safe at their home.

So ruled the judge in a recent Tax Court case, Andrew McNulty et al. v. Commissioner. The decision will cost Mr. McNulty and his wife Donna dearly—taxes of nearly $270,000 on about $730,000 of IRA assets, plus penalties likely to exceed $50,000.

The ruling disallows a scheme that was heavily promoted several years ago, when radio and internet ads touted the benefits of using IRA assets to buy gold and silver coins and then store them at home or in a safe-deposit box. Promoters based pitches on a perceived ambiguity in the law, despite warnings from the Internal Revenue Service and legal specialists.

These pitches are less common now, but they’re still around. Savers who have bought into them or are considering such a move should reconsider right away.

The McNulty case has a broader lesson as well: It’s a cautionary tale showing how dangerous it can be to invest retirement-plan funds in alternative assets without proper guidance.

“Good tax advice may appear expensive, but it’s not as costly as blowing up your IRA,” says Warren Baker, an attorney with Fairview Law Group in Seattle who specializes in alternative-asset IRAs.

Here’s what happened in the McNulty case, starting with some background.

Savers who have tax-favored retirement plans such as traditional IRAs, Roth IRAs, and Solo 401(k)s usually invest the assets in securities like stocks, mutual funds and exchange-traded funds.

But they don’t have to. The law gives retirement-plan owners broad latitude in how they invest funds, as long as it’s not in collectibles like artwork, jewelry, antique furniture, cars, wine and such.

Ami Givon, a benefits attorney with GCA Law Partners in Mountain View, Calif., says he has seen retirement accounts holding investments in real estate, litigation funding, deeds of trust and cryptocurrency. Mr. Baker says he knows of an IRA investment in a sports franchise, and ProPublica’s reporting on Peter Thiel’s $5-billion Roth IRA said his account had large amounts of nontraded stock.

Savers investing in alternative assets must follow strict rules against self-dealing. Otherwise, they risk disaster. For example, an IRA owner can use account funds to invest in a rental property like a beach house. But if she uses it herself for a week of vacation, that’s a “prohibited transaction” that dissolves the IRA, triggering taxes and perhaps penalties.

The McNultys ran afoul of such rules. Their attorney, Thomas Quinn of McLaughlinQuinn in Providence, R.I., said they declined to comment on the case and are considering an appeal.

According to the decision, the couple in 2015 began moving nearly $750,000 of existing retirement-plan funds, including from a MetLife annuity and 401(k), into self-directed IRAs. Then they had the IRAs purchase shares in limited-liability companies that in turn invested about $730,000 in a condominium plus gold and silver American Eagle coins.

These moves are legal: The law allows IRAs to invest in physical gold and silver, and many savers hold alternative assets through LLCs to ease administration. By using an LLC, the IRA owner doesn’t have to ask the custodian to, say, cut a check to pay a plumber for repairs to a rental property within the IRA.

But in an IRS audit, Mr. McNulty, a Rhode Island-based plant manager at a sailcloth factory, conceded that he engaged in prohibited transactions in 2015 and 2016, although the decision didn’t say what they were. That dissolved his IRA and caused taxable IRA payouts to him of about $316,000.

That left two issues for Tax Court Judge Joseph Robert Goeke to decide: whether Donna McNulty’s storage of about $411,000 of gold and silver American Eagle coins in a safe at her home was permitted under the law, and whether the couple owed stiff penalties for understating their tax. The couple lost on both issues.

According to the decision, Mrs. McNulty, a registered nurse, was careful with her IRA’s coins in some ways. She opened a bank account in the name of the LLC, documented the purchase of the coins, and labeled the coins as belonging to her IRA-owned LLC when she put them in the couple’s safe.

However, the judge ruled that her “unfettered control” of the coins, if upheld, would be ripe for abuse. He clarified what some saw as a gray area and said the law requires independent oversight of investments in coins or bullion by a third-party fiduciary—so it doesn’t allow for storage in a safe at home. Because that wasn’t allowed, Mrs. McNulty had a taxable payout from her IRA payout of the coins’ $411,000 value.

The decision also came down hard on the McNultys’ reliance on their LLC provider’s advertisements instead of competent professional advice, calling home-storage gold IRAs a “questionable internet scheme.” It added that the McNultys didn’t act in good faith because they didn’t disclose information about their IRAs to the CPA who prepared their 2015 and 2016 tax returns.

As a result, the judge imposed accuracy penalties of 20% of the McNultys’ tax understatement under Section 6662(a) of the tax code. Based on the facts in the decision, the penalty comes to about $54,000.

Comments

  • Lesson learned! IRA's are a racket and any "financial professional" who recommends one is a scammer.

    Got it! Thanks for cross-posting this!

  • derrybderryb Posts: 36,034 ✭✭✭✭✭
    edited December 12, 2021 6:28AM

    It's been official since metals were allowed in an IRA: You cannot take possession of the metal, even to turn it over to the custodian. It has to go strait to custodian upon purchase. Couple were obviously ill advised by person selling them the metal.

    There is no good reason to hold physical metal in an IRA when there are much better IRA/PM options offering more flexibility.

    I disagree that all IRA's are bad, especially when there is a tax free earnings option with a ROTH IRA. As long as the FED destroys savings while pumping equities any equity IRA has been a good IRA.

    The decline from democracy to tyranny is both a natural and inevitable one.

  • tincuptincup Posts: 4,724 ✭✭✭✭✭

    I don't think IRA's themselves are a racket.

    But putting precious metals in an IRA has has always seemed rather foolish to me. I'm pretty sure one of the requirements is that independent third party control is part of it... and if someone else is actually 'holding' the metals for you, do you really own it??

    In this case, they appear to have kept control of the metals on their own property.... lesson learned indeed.

    ----- kj
  • I don't think keeping control on the metal on their own property is the problem.

    In this case, what we have here is clearly FUD. May I suggest using scarier three letter government agencies in the future, like the Fascist Bureau of Intimidation (FBI). :smiley:

  • derrybderryb Posts: 36,034 ✭✭✭✭✭

    IRA precious metals must be stored in an IRS-approved depository.

    The decline from democracy to tyranny is both a natural and inevitable one.

  • PerryHallPerryHall Posts: 45,209 ✭✭✭✭✭

    Is it ever a good idea to own gold and then tell the government about it?

    Worry is the interest you pay on a debt you may not owe.

  • jmski52jmski52 Posts: 22,271 ✭✭✭✭✭

    IRAs were designed to defer taxes on earnings, and gold sitting in an IRA account doesn't have earnings until it is liquidated. The rules on gold in an IRA are designed to provide gov.com with complete visibility into the IRA holdings. Who needs that?

    Q: Are You Printing Money? Bernanke: Not Literally

    I knew it would happen.
  • derrybderryb Posts: 36,034 ✭✭✭✭✭

    problem with deferring taxes is that they never become lower, only higher.

    The cat's meow is the ROTH where there is no deferred tax on input yet zero tax on all future account earnings.

    The decline from democracy to tyranny is both a natural and inevitable one.

  • blitzdudeblitzdude Posts: 5,303 ✭✭✭✭✭

    IRAs are WONDERFUL investment tools. The couple in this case simply lacked common sense. Investing IRA funds in PMs in the first place is not very bright but to think they could take possession is flat out foolish. SMH!

    The whole worlds off its rocker, buy Gold™.

  • rte592rte592 Posts: 1,387 ✭✭✭✭✭

    @blitzdude said:
    IRAs are WONDERFUL investment tools. The couple in this case simply lacked common sense. Investing IRA funds in PMs in the first place is not very bright but to think they could take possession is flat out foolish. SMH!

    Everyone lacks common sense when the .gov keeps changing the rules.

  • derrybderryb Posts: 36,034 ✭✭✭✭✭
    edited December 12, 2021 12:42PM

    @blitzdude said:
    IRAs are WONDERFUL investment tools. The couple in this case simply lacked common sense. Investing IRA funds in PMs in the first place is not very bright but to think they could take possession is flat out foolish. SMH!

    IRAs are wonderful long term investment tools. PMs have demonstrated excellent long term growth. Investing ROTH IRA funds in PM related (not physical metals) investments is a smart move and provides tax free gains. There are good investment choices in both individual mining stocks and numerous PM related ETFs. These can be traded as often as desired, without penalty, in an IRA as long as there is no actual withdrawal of funds.

    The major disadvantage to a physical PM IRA, in addition to the storage and maintenance fees, is the inability to liquidate easily and cheaply with market fluctuations during the life of the account. A self managed broker account offers freedom of many investment choices that can be traded at will and as often as desired.

    The decline from democracy to tyranny is both a natural and inevitable one.

  • taxmadtaxmad Posts: 960 ✭✭✭✭

    @jmski52 said:
    IRAs were designed to defer taxes on earnings, and gold sitting in an IRA account doesn't have earnings until it is liquidated. The rules on gold in an IRA are designed to provide gov.com with complete visibility into the IRA holdings. Who needs that?

    Actually they deferred taxes on wages. Stocks sitting in a IRA account won't have earnings until it is liquidated either. The real issue is lack of notification to the IRS when an IRA asset is liquidated so the appropriate taxes can be assessed...

  • derrybderryb Posts: 36,034 ✭✭✭✭✭

    @jmski52 said:
    The rules on gold in an IRA are designed to provide gov.com with complete visibility into the IRA holdings. Who needs that?

    The IRS needs that because IRAs are taxable, income generating entities. IRS is not as concerned with holdings as much as they are the income generated when those holding are paid out to the account holder. There is a reason it is called income tax.

    The decline from democracy to tyranny is both a natural and inevitable one.

  • MsMorrisineMsMorrisine Posts: 32,045 ✭✭✭✭✭

    @crito_is_baaack said:
    Lesson learned! IRA's are a racket and any "financial professional" who recommends one is a scammer.

    Got it! Thanks for cross-posting this!

    I requested the cross-post to draw more forumites here. And I knew it’d be eaten up here

    The point is be careful of the financial professionals suggesting holding any ira asset where the ira person has access to it. The article mentions real estate where the ira person can use it. Same issue different assets.

    Current maintainer of Stone's Master List of Favorite Websites // My BST transactions
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